Final Results

RNS Number : 4715F
Cadogan Petroleum PLC
27 April 2011
 



 

·      Extension received on the Pirkovskoe licence to 2015

·      Farm-out campaign being pursued to conserve existing cash and spread the risks associated with further exploration and development

·      Resolution of  Pirkovskoe and Zagoryanksa licences issues

·      Total capital expenditure of £7.8 million (2009: £23.5 million) during the year

·      Net cash and cash equivalents at year end of £23.5 million (2009: £30.5 million)



Introduction and strategic alliance with Eni

I am delighted to be able to report that, since shareholders approved the resolutions at the 2010 Annual General Meeting giving the Board a clear mandate to pursue its operational strategy in Ukraine, significant progress has been made. The Group has completed the rationalisation of its operations in Ukraine and is now in a position to develop its assets more aggressively. Licence issues, one of the factors that have hindered the Group's potential since the IPO in June 2008, have now been resolved. 

In addition, on 13 April 2011, the Company announced a very significant agreement, conditional on the approval of shareholders and the relevant Ukrainian authorities, with Eni S.p.A ("Eni") the major Italian integrated energy company. Eni will initially acquire a 30 per cent interest in our Pokrovskoe licence, with the option to acquire a further 30 per cent interest in the future. Eni will also acquire a 60 per cent interest in our Zagoryanska licence. Both licences are in eastern Ukraine. The initial consideration will comprise 100 per cent funding of a work programme of approximately USD30 million (excluding VAT), including drilling and seismic re-processing, plus a USD38 million payment.  Subject to successful results from the above programmes and award of production licences, Eni will pay the Group further amounts of up to USD90 million. 

The announcement of this major transaction signifies a turning point for Cadogan. With Eni as a strategic partner, the Group can more rapidly develop the potential in these two licences and can embark on other significant oil and gas opportunities in Ukraine.

The transaction, which is a class one transaction under the UKLA Listing Rules, is subject to Cadogan shareholder and Ukrainian Anti-Monopoly Commission approval. The Company plans to issue a circular to shareholders in May 2011, giving full details of the proposed transaction and convening a general meeting of the Company prior to mid-June 2011.  It is planned that the transaction will complete on or around 30 June 2011.

Operations summary

During the first half of 2010 the Board kept operations to a minimum, whilst the future of the Group was determined.  Once it was clear that shareholders had mandated the Board to pursue its operational strategy in Ukraine, a number of relatively low-cost work programmes were initiated. At Zagoryansaka 3, a successful well-testing programme was completed in joint venture with a local contractor and the well tied-in to nearby production facilities.  Commercial production commenced in August.  At Pokrovskoe 1, a deepening of the well commenced in October and was suspended in December at 5,450 metres. We encountered strong indications of gas on the LWD logs over significant sections in the Lower Visean.  Completion of this well is expected within the current year as part of the Eni work programme.

 At Bitlyanska, our exploration asset in the west of Ukraine, a 2D seismic survey of the licence area was successfully undertaken in the later part of the year and the data acquired is currently being interpreted.

Licence developments

In September 2010 the Higher Administrative Court of Ukraine formally approved the terms of a settlement agreement between Cadogan and NSJC Nadra Ukraine ("Nadra"), a state-owned company, whereby Nadra and its subsidiary Poltavanaftogazgeology withdrew the case between them over the licences currently owned by Cadogan for the Pirkrovskoe and Zagoryanska fields. As part of the settlement the Group purchased five deep wells on the Zagoryanska field and the development of this field forms part of the agreed work plan with Eni.  The Board now views the previous challenge to the Pirkrovskoe and Zagoryanska licences as fully concluded.  Nadra is a significant presence in Ukraine and Cadogan looks forward to cooperating with them in the future.

Overview of financial position

At 21 April 2011 the Group had current cash and cash equivalents of approximately £23.1 million.  This is more than adequate to fulfil the Group's current work programmes and the proceeds from the Eni transaction will enable the Group to grow its position in Ukraine.

Litigation

In June 2009, the Group commenced litigation in the High Court in London against the former Chief Executive Officer, Chief Operating Officer and certain third parties, including individuals and suppliers. The action was initiated to seek a return of funds to the Group associated with the procurement of and payment for certain assets and services. For the year to 31 December 2010 the Group has incurred costs of £1.4 million (2009: £6.1 million). The litigation has yet to come to trial, but the Group has secured a number of settlements with the various parties in the case. The resultant settlements have in 2010 generated £6.0 million which has been disclosed in Other Operating Income. The litigation continues against the former Chief Operating Officer.   

In addition under the settlement with Global Process Systems LLC ("GPS") entered into in October 2009, GPS took two gas plants back into stock and undertook to pay the Group USD37.5 million. The Group received USD1 million on execution in 2009, USD3.5million in 2010 and an additional USD3.0 million in January this year. All three payments have been recorded as a settlement of a receivable. The balance is due in three equal tranches, each of USD10 million, during 2011. The first payment of USD10 million of the remaining USD30 million was due to be paid to the Group on 14 February 2011 but was not received. A cure period expired on 18 April 2011. In April 2011 the Board commissioned a desktop study of the plants by an independent third party, which included an estimate of value subject to certain assumptions and caveats.  Having taken the foregoing into account, the Board considers that the plants are likely to be worth close to the USD30 million (approximately £19.4 million) receivable that remains outstanding under the agreement.  The Group retains legal title to the plants until the final payment has been received from GPS, with whom negotiations continue.

Employees

2010 was a challenging year for Cadogan's employees, especially with the uncertainty over Group's future undecided until mid-year.  As always the staff has responded positively to events and continue to remain committed to building a business in Ukraine. The Board would like to thank them for their dedication and hard work.

Board and governance

Since the 2010 Annual General Meeting the Board has been restructured with the addition of three new directors - Alessandro Benedetti and Bertrand des Pallieres, who represent SPQR Capital Holdings S.A. which purchased a significant shareholding in the company and is supportive of management's plans, and Gordon Stein as Chief Financial Officer. All three directors will seek re-appointment at the forthcoming annual general meeting. 

Alan Cole and I have decided not to seek re-election at the forthcoming annual general meeting. As a result our Senior Independent Director Philip Dayer will act as interim chairman and lead the search for a new chairman and an additional independent non-executive director. As is best practice, all the remaining directors will be putting themselves forward for re-election at the annual general meeting.

Prospects

The Board remain committed to building a successful oil and gas business in Ukraine.  Over the past year management have successfully rebased the Company commensurate with its financial resources, whilst completing the total overhaul of its operating procedures, and improved the technical analysis and management of its resource base.  The transaction with Eni will, if approved by shareholders, prove transformational to the prospects of the Group, facilitating the exploitation of the Pokrovskoe and Zagoryanska licences and aligning the interests of a major integrated energy company with Cadogan in Ukraine, a country where the opportunities in oil and gas remain abundant.  The Board looks forward to the future with confidence.

 

 

 

 

At the beginning of 2011 the Group held working interests in nine (2009: eleven) gas, condensate and oil exploration and production licences in the east and west of Ukraine. All these assets are operated by the Group and are located in either the Carpathian basin or the Dnieper-Donets basin, in close proximity to the Ukrainian gas distribution infrastructure. The Group's primary focus is on the Bitlyanska licence, (Carpathian Basin, west Ukraine), Pokrovskoe, Zagoryanska and Pirkovskoe licences (Dnieper-Donets basin, east Ukraine) where the Group's main reserve and resource potential is located.

 

 

Summary of the Group's licences held during the year

Major licences

(1)  E&D = Exploration and Development.

(2)  The working interest on the Bitlyanska licence declines on a stepped basis, every five years after the commencement of production on each well. The Joint Activity Agreement ('JAA') also distinguishes working interests on new wells and work over wells with the former offering a higher share to the Group. Effective working interests are shown above.

(3)  Discussions are currently underway with the Ministry of Environmental Protection in Ukraine to renew the licence for a further five years in August 2011.

(4)  Although this licence expired in December 2009, it was reacquired by the Group in September 2010 at commercially advantageous terms. 

 


Bitlyanska licence area

The Bitlyanska exploration and development licence covers an area of 390 square kilometres and the Group has a 96.5 per cent to 97.1 per cent working interest, varying with production. There are three hydrocarbon discoveries in this licence area: Bitlya, Borynya and Vovchenska. The Borynya and Bitlya fields hold 211.5 mmboe (2009: 211.5 mmboe) and 113.92 mmboe (2009: 113.9 mmboe) of Contingent Resources respectively, while no Reserves and Resources have been attributed to the Vovchenska field.

The Borynya 3 well was terminated at a drilled depth of 5,325 metres in 2009 and the well was suspended for future evaluation. Several discrete gas bearing pressure regimes were penetrated and good quality data were obtained from the well. In June 2009, Borynya 3 tested gas from a secondary reservoir at a maximum flow rate of 128,000 cubic metres per day during a limited duration drill stem test.  

Bitlya is a 3,000 metre normally pressured gas field which has already been drilled by the Bitlya 1 well. This well established the presence of hydrocarbons in a structure identified by Soviet era 2D seismic. This has been reprocessed and reinterpreted using modern geophysical techniques, including generation of a structurally balanced section to verify the tectonic activity in the area. A targeted seismic 2D survey of the licence area was successfully undertaken in September 2010 and the data acquired is currently being interpreted. Although the structure is confirmed by earlier analysis the seismic survey undertaken in 2010 will indicate the geometry and extent of the closure. 

Pokrovskoe licence

The Group has a 100 per cent working interest in the Pokrovskoe licence which holds 51.1 mmboe (2009: 51.1 mmboe) of Prospective Resources. The exploration licence covers 49.5 square kilometres and runs until August 2011. Discussions are currently underway with the Ministry of Environmental Protection in Ukraine to renew the licence for a further five years. There is a two well drilling commitment (the wells have been partially drilled), 3D seismic work commitment as well as the construction of a gas treatment plant if required. Interpretation of the 3D seismic was completed in early 2010 and confirmed the presence of a prospect with four-way closure at the Lower Visean level and potentially in the deeper Tournasian sediments beneath both the Pokrovskoe 1 and Pokrovskoe 2 well locations, separated by a geological fault.

Deepening of the Pokrovskoe 1 well commenced in October 2010 and supported management's revised structural interpretation. The well encountered strong indications of gas during drilling and on the LWD logs over significant sections in the Lower Visean.  Due to the onset of winter weather and the complexity of the drilling operations, it was decided to suspend drilling operations at 5,450 metres. An alternative all weather rig has been sourced and commercial negotiations are underway with a view to recommencing drilling operations in the second quarter of 2011.   

Pokrovskoe 2 was the first exploration well drilled on the Pokrovskoe structure and was terminated at a drilling depth of 5,185 metres, where the well suspended for future evaluation and possible deepening. During drilling and coring operations across the Visean (V17 to V22) formations, there was strong gas influx into the well bore.

The Group has a 90 per cent working interest in the Zagoryanksa licence area. The Zagoryanska licences hold 96.4 mmboe of Contingent Resources (2009: 96.4 mmboe of Contingent Resources). The exploration and development licence covers 49.6 square kilometres and the licence was extended in 2009 until April 2014.

The required work programme includes: a 3D seismic survey (completed); testing of well Zagoryanska 3 (underway); workover of well Zagoryanska 2; the drilling of an appraisal well; and conducting geological and economic estimation of hydrocarbon Reserves, which are to be verified by the State of Reserves Commission.

The Zagoryanska 3 well had been drilled in 2008, to a TD of 5,110 metres in the Lower Visean (V26) and was suspended in order to evaluate the data obtained from testing.  In late 2009, additional testing of the well was farmed-out to a local company to test the well at their own expense in return for a share of any future production from the well. The test indicated sufficient gas in the Upper Visean (V18) for commercial production to commence and the well was tied into the Group's Zagoryanska gas treatment plant. Production commenced in August 2010 at a flow rate of 55 mcm/day (2 million scf/day) of gas and 15 t/day (120 bpd) of condensate.  Average monthly production rates during 2010 were 51 mcm/day gas and 10 t/day condensate.

As a result of the settlement agreement entered into with NSJC Nadra Ukraine in September 2010 (refer to note 3(f)), the Group has purchased the Zagoryanska 3 well, which it was previously renting, together with four additional wells on the field. The Group intends to work- over some of these wells in 2011 and if successful put them into production.

As part of the transaction with Eni, announced since the year end and subject to shareholders approval, Eni will acquire a 60 per cent interest in the Zagoryanska licence for a payment of USD38 million, should the transaction complete later in the year. 

Pirkovskoe licence

The Group has a 97 per cent working interest in the Pirkovskoe licence which holds 2.4 mmboe (2009: 2.4 mmboe) of proved and probable Reserves, 5.0 mmboe (2009: 5.0 mmboe) of possible Reserves, 134.0 mmboe of Contingent Resources (2009: 134.0 mmboe of Contingent Resources). The exploration and appraisal licence covers 71.6 square kilometres and has been renewed until October 2015.

The required work programme includes work-over of the Pirkovskoe 460 well (completed), and the testing of Pirkovskoe 1 and deepening followed by testing of the suspended Pirkovskoe 2 wells, the drilling of a new well scheduled for 2013 and calculation of the potential hydrocarbon reserves.

Pirkovskoe 1 was the first appraisal well drilled in the northern part of the Pirkovskoe licence. The well was terminated at a TD of 5,723 metres in the Devonian D3 and after testing the Devonian and lower Carboniferous, the well was temporarily suspended. The testing and subsequent completion of several shallower Carboniferous oil and gas bearing zones was farmed out to a local company at no cost to Cadogan, in return for a share of any future production. This interval produced small volumes of oil and gas and is currently shut-in.

The Pirkovskoe 2 well was drilled to a depth of 4,580 metres, and has been suspended until the results of Pirkovskoe 1 have been reviewed. However there is an obligation to deepen to TD of 5450m.

The Group owns the Kraznozayarska gas treatment plant, on the Pirkovskoe licence area, which is connected to the UkrTransGas system. Its capacity was upgraded in July 2007 to 300,000 cubic metres per day of gas and 150 tonnes per day of condensate in anticipation of future production.

Minor fields

The Group has a number of minor fields located in western Ukraine. These include the following:

§  Debeslavtska licence area

An exploration and development licence and production licence, containing 0.2 mmboe of proved, probable and possible Reserves (2009: 0.3 mmboe). This licence is currently producing 100.7 boepd (2009: 132.0 boepd). The Group drilled a series of three shallow wells on the field using its own drilling rig. Results of this program are under evaluation.

§  Cheremkhivska licence area

A production licence containing 0.1 mmboe of proved, probable and possible Reserves (2009: 0.1 mmboe). This licence is currently producing 33.2 boepd (2009: 56.2 boepd).

·       Slobodo-Rungerska licence area

An exploration and development licence, with no booked Reserves and Resources (2009: nil). During 2010 the six producing wells on this licence were abandoned as they were no longer commercially viable. In 2009 only 7.6 bopd were produced from the shallow wells in difficult mountainous forest terrain. Reprocessing of seismic data is currently underway to assess the deeper potential of this licence.

 

 

·       Monastreyetska licence area

An exploration and development licence, with no booked Reserves or Resources (2009: nil). Re-entry of the Blazhiv 1 well was undertaken and minor oil production re-established at the rate of 10 bopd.


 

Overview

In 2010, the activities of the Group continued to be mainly in the exploration and development stage. However the commencement of production at the Zagoryanska 3 well and the expansion of activities at the Debeslavetske field enabled revenue to increase from £2.3 million in 2009 to £3.3 million in 2010. This increase, together with the continuation of the cost reduction programme initiated in 2009 and the recoveries achieved during the year, enabled the Group to achieve a small profit after tax of £0.9 million for 2010 (2009: loss of £107.3 million of which £87.3 million related to one-off impairments booked in that year). This profit was reflected by a corresponding small increase in the net asset position as at 31 December 2010 to £84.8 million from £83.6 million as at 31 December 2009. The curtailment of cash outflows initiated on the change of management was reflected by the net outflow for the year being reduced to £7.0 million (2009: £41.5 million)

Income statement

Profit before tax was £0.5 million (2009: loss of £107.2 million after impairments of £87.3 million). Revenues comprised sales of gas from the Debeslavetske and Cheremkivske fields and, additionally in 2010, of gas and condensate from the Zagoryanska 3 well. Cost of sales, which represents production royalties and taxes, depreciation and depletion of producing wells and direct staff costs increased to £2.7 million in 2010 from £2.0 million in 2009 to give a gross profit of £0.6 million (2009: £0.3 million).

·      Other administrative expenses of £8.4 million (2009: £25.3 million) comprise other staff costs, professional fees, Directors' remuneration, depreciation charges on non-producing property, plant and equipment. In addition to recurring administrative expenses, £1.4 million (2009: £6.1  million) of professional costs were incurred in relation to litigation, £0.1 million  (2009: £5.0 million) loss on disposal of property, plant and equipment, £nil (2009: £1.1 million) provision for bad and doubtful debts, and £nil (2009: £0.8 million) of consultancy fees were incurred to defend the legal challenges indirectly associated with the Pirkovskoe and Zagoryanska licences and also to extend the Zagoryanska licence.

·      Other operating income has been disclosed separately in the income statement so as not to distort the comparison of administrative expenses by netting recoveries against them. Of the total of £7.6 million shown in this category for 2010, £6.0 million (2009: £nil) is represented by recoveries from former members of management, suppliers and related parties through out of court settlements and the remainder of £1.6 million (2009: £4.6 million) relates to net foreign exchange gains.

·      Reversal of impairment charges in 2010 comprised of £1.5 million (2009: £13.2 million impairment) representing net recoveries of Ukrainian VAT. Net losses of £0.9 million (2009: £6.6 million) were incurred on sales of surplus inventories and provision for inventory. The income statement for 2009 shows impairment charges of £87.3 million which were made to reduce the carrying values of goodwill, E&E assets, PP&E assets, prepayments, inventories and other receivables as at 31 December 2009 (see below). No further impairment charges were made in 2010.

Investment revenue decreased during the year to £0.1 million (2009: £0.4 million) due mainly to a reduction of interest rates and to the level of funds held.

Cash flow statement

The Condensed Consolidated Cash Flow Statement shows expenditure of £4.0 million (2009: £15.9 million) on intangible E&E assets and £3.8 million (2009: £7.6 million) on PP&E.

Balance sheet

As at 31 December 2010, the Group had net cash and cash equivalents of £23.5 million (2009: £30.5 million). Intangible E&E assets of £4.0 million (2009: £nil) represent the carrying value of the Group's investment of exploration and appraisal assets during the year to 31 December 2010 following the impairment as at 31 December 2009 noted above. The PP&E balance of £34.9 million at 31 December 2010 (2009: £32.0 million), mainly comprised of the cost of developing fields with commercial reserves and bringing them into production. Trade and other receivables of £25.0 million include £21.3 million (2009: £18.8 million as non-current other receivable; £4.1 million as current other receivable) receivable in respect of the settlement with GPS (refer to note 3(a)).

 

The Group monitors its performance in implementing its strategy with reference to clear targets set out for five key financial and one key non-financial performance indicators ('KPIs'):

·       to increase oil, gas and condensate production measured on number of barrels of oil equivalent produced per day ('boepd');

·       to increase the Group's oil and gas reserves by de-risking possible resources and contingent reserves into proved plus probable reserves ('2P'). This is measured in million barrels of oil equivalent ('mmboe');

·       to increase the realised price per 1,000 cubic metres;

·       to decrease the cost per barrel for exploration and acquisition related expenditure;

·       to increase the Group's basic and diluted earnings per share; and

·       to reduce the number of lost time incidents.

In 2009 the Group focused on reducing costs and headcount and therefore used reduction in monthly cash outflows from operating and investing activities together with the reduction in the numbers employed to monitor its performance. In 2010 the Group has resumed using KPIs which it used prior to 2009.

These KPIs are applied across the Group. The Group's performance in 2010 against these targets is set out in the table below, together with the prior year performance data. No changes have been made to the source of data or calculation used in the year.

Unit

2010

2009

Financial KPIs




Average production (working interest basis) (1)

Boepd

268

 234

2P reserves (2)

Mmboe

2.6

2.7

Realised price per 1,000 cubic metres (3)

£

197.7

188.5

Basic and diluted earnings per share (4)

pence

0.4

(46.4)

Non-financial KPIs




Lost time incidents (5)

Incidents

-

-

(1)    Average production is calculated as the average daily monthly production during the year.

(2)    Quantity of 2P reserves as at 31 December 2009 is based on Gaffney, Clines & Associates' independent reserves report dated 16 March 2010. Reserves at 31 December 2010 are updated for the actual production during 2010.

(3)    This represents the average price received for gas sold during the year (including VAT).

(4)    Basic profit/(loss) per Ordinary share is calculated by dividing the net profit/(loss) for the year attributable to Ordinary equity holder of the parent by the weighted average number of Ordinary shares during the year.

(5)    Lost time incidents relate to injuries where an employee/contractor is injured and has time off work.

Related party transactions

Related party transactions are set out in note 30 to the Consolidated Financial Statements of the 2010 Annual Report. 

Treasury

The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash and cash equivalent balances in both USD and GBP held primarily in the UK and holds these mostly in term deposits depending on the Group's operational requirements. Production revenues from the sale of hydrocarbons are received in the local currency in Ukraine ('UAH') and to date funds from such revenues have been held in Ukraine for further use in operations rather than being remitted to the UK. Funds are primarily converted to USD and transferred to the Company's subsidiaries to fund operations at which time the funds are converted to UAH. Some payments are made on behalf of the subsidiaries from the UK.




 

The Group did not commission an independent Reserves and Resources Evaluation of the Group's oil and gas assets in Ukraine, as at 31 December 2010 due to the limited level of drilling and operational activity undertaken during 2010. The summary of the Reserves and Resources below are based on the Independent Reserves and Resources Evaluation performed by Gaffney Cline and Associates as at 31 December 2009 adjusted for 2010 actual production.

Summary of Reserves

As of 31 December 2010

Working interest basis


Gas

bcf

Condensate

mmbbl

Oil

Mmbbl

Proved and Probable Reserves at 1 January 2010

11.5

0.6

-

Production

(0.2)*

-

-

Proved and Probable Reserves at 31 December 2010

11.3

0.6

-

Possible Reserves at 1 January 2010 and 31 December 2010

19.5

1.5

-

*During 2010 the Group produced additional 0.3bcf of natural gas and 0.01mmbl of condensate from Zagoryanska field which were not included by Gaffney Cline and Associates in the reserves balances at 31 December 2009 provided in the Reserves and Resources Evaluation Report as at that date.

Summary of Contingent Resources

As of 31 December 2010

Working interest basis


Gas

bcf

Condensate

mmbbl

Oil

Mmbbl

Total

mmboe

Contingent Resources at 1 January 2010 and 31 December 2010

2,488.0

108.1

-

555.9

 

Reserves are only assigned to Pirkovskoe, Debeslavetska and Cheremkhivska fields.

Although commercial production has been achieved at Zagoryanska field no 2P reserves have been booked as of 31 December 2010 as the Group did not receive an update CPR to independently confirm the Reserves quantities.

Contingent Resources are assigned to Pirkovskoe, Zagoryanska, Borynya and Bitlya fields, where development is contingent on further appraisal.

Prospective Resources of 237 bcf gas and 8.4mmbl condensate are attributed to Pokrovskoe field, where there has not yet been a production test.



For the year ended 31 December 2010

 

Notes

2010

£'000

2009

£'000





3,251

2,342


(2,683)

(2,022)


568

320








(8,396)

(25,299)

7

-

(63,499)

7

608

(23,752)


(7,788)

(112,550)

6

7,625

4,641


405

(107,589)





130

407


(4)

(8)


531

(107,190)




9

320

(113)

8

851

(107,303)








851

(107,303)


-

-


851

(107,303)





pence

pence

10

0. 4

(46.4)

 

For the year ended 31 December 2010


 



2010

£'000

2009

£'000

 



As at 31 December 2010










For the year ended 31 December 2010

(3,808)

(3,998)

407

130

(7,269)





240

-

240

-



(7,007)

47



30,505

23,545



For the year ended 31 December 2010

 

 

 

 

 

 

 

 

Share

capital

£'000

 

 

 

 

Share

premium

account

£'000

 

 

 

 

 

Retained earnings

£'000

 

 

 

 

Cumulative

 translation

reserves

£'000

 

 

 

Other reserves

 

 

 

 

 

Non-controlling

 interest

£'000

 

 

 

 

 

 

 

Total

£'000

Share-based payment

£'000

 

 

Reorganisation

£'000

As at 1 January 2009

6,933

250,373

(49,477)

(9,997)

5,357

890

(634)

203,445

Share-based payments

-

-

-

-

(1,154)

 

-

-

(1,154)

Net loss for the year

-

-

(107,303)

-

-

 

-

-

(107,303)

Capital reduction

-

(250,373)

250,373

-

-

-

-

-

Exchange translation differences on foreign operations

-

-

-

-

 

-

-

(11,377)

As at 1 January 2010

6,933

-

93,593

(21,374)

4,203

890

(634)

83,611

Share-based payments

-

-

3,634

-

(3,634)

-

-

-

Net income for the year

-

-

851

 

-

-

 

-

-

851

Exchange translation differences on foreign operations

-

-

-

-

-

-

338

As at 31 December 2010

6,933

-

98,078

 

(21,036)

569

 

890

(634)

84,800



For the year ended 31 December 2010

 

1.        

2.        

(a)        Basis of accounting

The prior year consolidated income statement reflects a reclassification of £4.6 million of foreign exchange gain from other administrative expenses to other operating income so as not to distort the comparison of the administrative expenses by netting recoveries against them.

·     

·     

·     

·     

3.           

In the application of the Group's accounting policies, which are described in note 2, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both the current and future periods.

The following are the critical judgements and estimates that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

(a)           Other receivable recognised in relation to settlement with Global Process Systems LLC ('GPS')

(b)           Impairment of E&E and PP&E

At 31 December 2010 the Group reviewed the carrying amounts of its PP&E and E&E assets to determine whether there is any indication that those assets have suffered an impairment loss. No indicators of non-recoverability of the carrying amounts of the above mentioned assets existed at the balance sheet date. The Directors believe that the Pokrovskoe exploration license which expires in August 2011 will be renewed for further 5 years.

Impairments of £63.5 million were charged in 2009 to reduce the carrying values of the Group's goodwill, E&E assets and PP&E assets as required by IAS 36 Impairment of Assets and IFRS 6 Exploration for and Evaluation of Mineral Resources  as a result of the significant downward revisions to the Group's Reserves and Resources estimates in the independent Reserves and Resources Evaluation received in early 2010 and poor test results on wells drilled to that date.

In addition to the impairment provided in 2009 against the Group's goodwill, E&E and PPE assets, further impairment charges of £23.8 million against the carrying value of certain assets were provided for in 2009 (see note 7). Refer to the 2009 Annual Financial Report for a detailed discussion of the assumptions made to calculate the various impairments in 2009. Also refer to notes 11 and 12 for details of the carrying value of these assets.

(c)            Reserves

Commercial Reserves are proven and probable ('2P') oil and gas reserves, which are defined as the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. There should be a 50 per cent statistical probability that the actual quantity of recoverable Reserves will be more than the amount estimated as proven and probable Reserves and a 50 per cent statistical probability that it will be less.

Commercial Reserves used in the calculation of depreciation and for impairment test purposes are determined using estimates of oil and gas in place, recovery factors and future oil and gas prices. Management base their estimate of oil and gas Reserves and Resources upon the Report provided by independent advisers.

Although as at 31 December 2009 no 2P reserves were identified at Zagoryanska, subsequent to the issue of the 2009 Annual Financial Report, commercially recoverable gas was identified in that field.

The extension of the Pirkovskoe licence to 2015 was approved on 23 September 2010 by the Ministry of Ecology and Cadogan and the license was extended to November 2015.

The Group has significant receivables from the State Budget of Ukraine relating to reimbursement of VAT arising on purchases of goods and services from external service and product providers.

The Group therefore recognises recoverable VAT only to the extent that it is probable that VAT payable arising on the sales of gas production will be sufficient to offset the VAT due from the State within a reasonable period. Estimating the recoverability of VAT requires management to make an estimate of the future revenues in order to calculate amounts and timing of the VAT payable available for offset. A

(e)           Going concern

The Group's business activities, together with the factors likely to affect future development, performance and position are set out in the Business Review on pages. The financial position of the Group, its cash flow and liquidity position are described in the Financial Review. In addition, note 2(c) provides details as to the basis on which the Directors have adopted the going concern basis of accounting in preparing the annual financial statements.

The following matter was previously disclosed as a critical accounting judgement but has now been resolved.

(f)            Legal proceedings surrounding the validity of the Pirkovskoe and Zagoryanska licences

The Group was involved in legal proceedings, surrounding the validity of the Pirkovskoe and Zagoryanska licences challenged by Poltavanaftogasgeology ('PNGG'), a subsidiary of the Group's joint venture partner, NJSC Nadra Ukraine, a state-owned company ('Nadra'), in relation on previous possession of these licences

With regard to these proceedings on 8 September 2010, the Group entered into a mutual settlement agreement with Nadra and PNGG, whereby PNGG and Nadra applied to the Higher Administrative Court ("the Court") of Ukraine to withdraw the cases between them over the previous ownership of the licences for the Pirkovskoe and Zagoryanska fields and the Group also agreed to purchase five wells on the Zagoryanska licence area.

PNGG and Nadra applied to the Court to withdraw the cases on 13 September 2010. The Court approved the agreement and these applications on 14 October 2010 in respect of the Pirkovskoe licence and on 21 December 2010 in respect of the Zagoryanska licence. The sale and purchase agreements with Nadra to acquire the Zagoryanska 3 well and four additional wells, for a total outlay of USD3.2 million (£2.0 million) excluding VAT were executed on 2 December 2010 and on 24 December 2010 respectively. As a consequence the indirect challenges to the Group's licences at Pirkrovskoe and Zagoryanksa have now been withdrawn from the Court by Nadra.

(g)           Share-based payments

The Group has equity-settled share option schemes and a performance share plan available to certain Directors and employees. In accordance with IFRS 2 Share-based payment, in determining the fair value of options granted, the Group has applied the Black-Scholes and stochastic models. As a result, the Group makes assumptions for expected volatility, expected life, risk free rate and expected divided yield.

4.        

5.        

6.         Other operating income


7.        

(Impairment) of oil and gas assets

Reversal/(impairment) of other assets

Total reversal/(impairment)

Refer to note 3(b) for further details on the various impairments recognised in the prior year. 

8.        

Consultancy fees in 2009 relate to consultancy fees paid in order to defend the legal issues over the Pirkovskoe and Zagoryanska licences and with the successful extension of the Zagoryanska licence.

Included within staff costs, is credit of £nil (2009: £0.8 million) relating to the reversal of equity-settled share-based payment transactions previously recognised.

In addition to the depreciation of PP&E of £1.2million (2009: £1.1 million), in the year ended 31 December 2010, depreciation of £0.4 million (2009: £1.6 million) was capitalised to E&E assets being depreciation of tangible assets used in E&E activities. 

9.        

 

 

25

25

400

(8)

(56)

-

200

(3)

(300)

-

(50)

-

-

-

(6)

-

17

-

10.      

851

(107,303)



In 2009, diluted loss per Ordinary share equals basic loss per Ordinary share as, due to the losses incurred in 2009, there is no dilutive effect from the subsisting share warrants and share options.

11.      


£'000


47,870


17,428


(29)


(298)


(4,073)


(5,299)


55,599


4,397


(53)


(21,029)


2,002


40,916





-

56,379

(780)

55,599

(20,669)

2,002


36,932







3,984


-

Refer to note 3(b) for a discussion of the impairment charge in the prior year.

12.      

 

 

 

Other

£'000

  Development

and

production assets

£'000

Total

£'000



43,192

7,601

298

102

(4,211)

(4,774)

42,208

4,594

360

-

(259)

(2,523)

1,495

45,875






678

4,125

568

2,222

2,790

-

4,862

4,862

(179)

(864)

(1,043)

(72)

(463)

(535)

995

10,199

422

1,323

1,745

(282)

(1,075)

(1,357)

30

397

427

1,165

11,014







1,113

34,861

1,566

32,009

Refer to note 3 (b) for a discussion of the impairment charge in prior year.

13.      



2009

£'000

2008

£'000


3,939

12,108


(1,363)

(6,586)


2,576

5,522

14.      

Other non-current receivables


2010

£'000

2009

£'000


-

18,835


-

18,835

2010

£'000


24,622

4,675


90

336


281

379


24,993

5,390



 

15.      

16.      

The completeness of the disclosure of related party transactions for the year ended 31 December 2010 was affected by the ongoing investigations into alleged irregularities involving certain former Directors.

17.      

A greater level of capital expenditure could however, be incurred in the above period to achieve the Group's corporate targets.

18.      

Farm-out of Pokrovskoe and Zagoryanskoe licenses


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